Salzburg Global Fellow Grzegorz Peszko explores ways to pursue a green energy transition from which even fossil fuel producers can benefit
This op-ed was written by Grzegorz Peszko, who attended the Salzburg Global “Policy Dialogue on Just Energy Transitions: Identifying Pathways to Prosperity Post Fossil Fuels” in September 2024.
A Green Transition Is Necessary for Humanity but Cannot Be Taken for Granted
The green transition is the first energy transition in human history done out of necessity rather than convenience. In the past, markets and technology autonomously delivered more productive forms of useful energy. Governments did not have to nudge consumers to switch from animal dung, whale oils, and fuelwood to coal, oil, gas, and nuclear energy.
Renewable energy is inexhaustible and helps avoid the potentially irreversible damages and unmanageable risks of climate and environmental change. It also makes fuel importers safer by reducing dependence on foreign, politically unreliable energy sources. Renewable electricity is already competitive in several off-grid uses. It is, however, less dense and transportable than fossil fuels, less predictable for grid power generation, and less convenient in transport and industry, particularly in fuel-producing countries.
Furthermore, without carbon pricing, we do not see the benefits of renewables and the costs of fossil fuels in our pockets when we make everyday choices as consumers, producers, investors, or voters. Climate change seems to inflict elusive damage on some strangers sometime in the future. Economists call it the “tragedy of the commons” and the “tragedy of the horizon”, respectively.
This time, we cannot rely on markets alone. The green energy transition must be induced by policies and consciousness.
Eventually, everybody wins. Natural scientists strongly agree that the continuation of present trends is “very likely” to increase the frequency and intensity of extreme weather events and bring environmental tipping points, beyond which human civilization as we know it may not survive.
During the transition, some groups will gain and act first. Others may perceive the transition as unjust and defend the status quo. Rather than an excuse to derail the transition, these real political dynamics justify a pragmatic sharing of costs and benefits to make the transition in the short-term self-interests of most people.
The Evolving Debate on the “Just Transition”
The debate on the “just transition” originated from labor unions’ concerns about workers in coal-dependent regions. The Salzburg Global “Policy Dialogue on Just Energy Transitions” focused on the broader challenges faced by oil and gas producing nations, especially those with lower incomes, for whom a transition represents a systemic, macroeconomic risk. The discussion oscillated between two arguments about who represents the driving force of a green transition: producers or consumers of fossil fuels.
Proponents of the “supply-side” hypothesis expect a green energy transition to be initiated by the producers of fossil fuels and their financiers. According to the argument, these actors would stop developing new reserves, cut current production, and invest in renewable energy instead. The supply-side climate policy literature and UNEP’s Production Gap reports provide an analytical basis, and the “divest” movement shows its political support. Even the International Energy Agency complained that oil and gas producers account for only 1% of total clean energy investment globally.
However, renewable energy is not what oil-producing companies do or what they are good at. They have some transferable skills, like in offshore wind or hydrogen, but they have no incentives to undermine their core business. Asking oil companies to lead the transition away from fossil fuels could be compared to asking lions and tigers to lead the vegetarian transition in the animal kingdom.
It should be noted that past technology disruptions were typically led by new entrants, rather than incumbents. Internal combustion vehicles were scaled by Ford rather than horse farmers. The cell phone market was disrupted by Nokia and then Apple, and not by large telecom cable companies. The electric vehicle transition was led by newcomer Tesla, not General Motors.
The “demand-side” hypothesis argues that energy consumers need to reduce global demand for fossil fuels, forcing energy producers to adjust their business models. In this approach, the incentives are more realistic, but markets do not yet see a global reduction of demand. Virtue signaling through long-term net-zero targets, not followed outside of the EU by policy incentives such as high carbon pricing, confuses the calculus of producers, investors, and financiers. They see that the demand for fossil fuels keeps growing, even though in 2023, green energy investments outpaced fossil fuel investments for the first time. Some skeptics call it green energy addition, rather than transition.
Russia’s invasion of Ukraine and the Israel-Hamas war stress-tested all the traditional narratives on a green transition. Fossil fuel prices and investment returns surged, creating incentives to produce more. The global scalability of a green transition is further hindered by high interest rates alongside industrial policies in China and the US that subsidize domestic firms and trade restrictions for green products and minerals. Popular support for an energy transition wobbled even in the EU, as many politicians (mostly falsely) linked energy price increases and inflation to renewables.
Possible Scenarios for a Demand-Driven Energy Transition
During our discussions at the Salzburg Global “Policy Dialogue on Just Energy Transitions”, which was organized jointly with Climate Strategies, Stanley Center for Peace and Security, and Windward Fund, we explored four possible geoeconomic narratives on how a demand-driven transition could unfold:
- “Survival of the fittest” narrative: Dwindling oil demand triggers bankruptcies of the smaller, high-cost fuel producers (often national companies) in weaker and poorer developing countries. The large, low-cost, and “deep pocket” producers (national and international companies) from rich countries increase their market share and power in the declining industry.
- “Geopolitical preferences” narrative: The largest consuming countries pursue a narrow and short-term approach to energy security by buying oil and gas primarily from “friendly” producers, leading to market segmentation along the lines of political alliances.
- “Green preferences” narrative: Major consumers apply transparent criteria to buy oil and gas from producers with the lowest carbon footprint. In this scenario, reducing emissions from supply chains and upstream operations, including methane leaks and gas flaring, are essential to stay competitive in the declining oil industry.
- “Development preferences” narrative: The largest consumers prioritize oil and gas purchases based on a balanced mix of socio-economic criteria. The producers from rich countries willingly forego some of their market share in the declining oil industry to allow lower-income producers to accumulate the capital necessary for diversification into green value chains. OPEC may “green” its global oil market stabilization mandate accordingly.
Nobody can predict the future. Arguably, however, the “survival of the fittest” and “geopolitical preferences” scenarios would lead to more conflicts, market disruptions, and price volatility, while policy reversals would increase climate risks. The “green preferences” and “development preferences” scenarios would likely be more “just” and manageable. For these to be successful, all major consuming countries would need to deliver on their promises to reduce demand. They would also need to create opportunities for oil-producing developing nations to discover competitive strength in high-value segments of the global green technology value chains and find a safe landing in transition. This is the most realistic and just pathway to meeting the climate goals of the Paris Agreement.
Grzegorz Peszko is a lead economist at the World Bank. For over three decades, he has been assisting fossil fuel-dependent countries and international organizations in designing and implementing macro-fiscal and trade policies to manage risks and opportunities of their transitions to a green, diversified, resilient and circular economy. He also worked at the European Bank for Reconstruction and Development (EBRD), the Organization for Economic Cooperation and Development (OECD), Krakow University of Economics, and the Polish Ministry of Environment.
Grzegorz Peszko attended the "Policy Dialogue on Just Energy Transitions: Identifying Pathways to Prosperity Post Fossil Fuels" in September 2024.
